The bypass is meant for the analog input not be processed by the onboard DSP, thus "bypassing" it. If you're using a digital input, your already in the digital domain using the DSP so it's not possible to bypass it.
I'm guessing you may be confused since you're used to using integrated amplifiers that have a "bypass" switch that will take the tone controls out of the signal path. Once you get into something digital, you working in a whole new domain. If you're using the analog inputs with the BYPASS mode on, that means the DAC, Digital to Analog Converter, in your CD player are doing all the digital conversion. If your using the digital input, the 950 is doing the digital to analog conversion. Not all DACs sound the same and you may just prefer the sound of your player's DACs as compared to the ones inside the 950.
Hope this helps...